Demand for horses peaked in the United States in 1905; more than a hundred years later, we still use “horsepower” as a measuring stick for our engines and motors. James Watt, the inventor of the steam engine, first coined the term following a calculation that deduced a single horse could push up to 33,000 pounds one foot in a minute. Since then, we’ve experienced multiple transformations in energy–bringing us to 1,000-horsepower electric vehicle (EV) engines.
Over the past 200 years, government and industry in the United States have jointly built a national network of energy infrastructure to support population growth and economic expansion. This network is expansive, well-connected, and visible from space: 3 million miles of natural gas pipelines, nearly 200,000 miles of petroleum pipelines, hundreds of electric generating stations, and millions of miles of transmission and distribution lines connecting them to many more customers. Our will and ability to repurpose this infrastructure is perhaps the greatest advantage for the U.S. to reduce emissions in hard-to-abate sectors.
“Energy Transitions” are typically marked by a milestone year, like 1885, when energy consumption from coal exceeded that from wood for the first time. It took coal over 140 years from its first commercial use in 1748 to reach the “transition” milestone. Historically, transitions have been accompanied by increases in energy demand, driven by population growth or industrialization, and characterized by adding to the energy mix to meet that demand.
As you’ll notice, coal did not eliminate wood, which still provides 4 percent of U.S. energy consumption today, and itself remains a heavily relied upon source of electricity production despite the emergence of oil and gas and the intensifying urgency to reduce emissions.
Entering 2023, we are on the brink of a remarkable and novel energy transition. There are numerous cost-competitive and commercially viable low-carbon energy sources (everything from fusion to geothermal) to compete with the 79% share that fossil fuels currently represent of the United States’ energy consumption. And while some characteristics may mirror prior energy transitions, this period will be neither gradual nor additive against the backdrop of the United States’ 2050 deadline to achieve net-zero greenhouse gas emissions.
Words that defined the energy transitions between 1748 and 2020 fail to accurately describe the challenges and opportunities of today. What was once gradual, is now rapid. What was once additive, demands reduction. While Energy Transition 1.0 was hard work and required ingenuity, its pace was manageable. In contrast, Energy Transition 2.0 will have a chaotic, demanding pace, defined by speed and substitution.
Energy Transition 2.0
Not only is this a necessity to meet the 2050 net zero deadline that the U.S. shares with many countries around the world, but it is an economic reality caused by simultaneous technology breakthroughs across so many energy technologies. Investors, entrepreneurs, and incumbent energy companies have come to see this as a gold rush—a once-in-a-generation business opportunity.
Substitution, or replacement, has been relatively rare in energy. In early Energy Transition 2.0, we’re warming this muscle up by replacing (hard though it has been) the easy stuff—focused on pairing the deployment of renewables with electrification of end-use applications, primarily in transportation and residential sectors. We can see this progress in the declining cost of renewable electricity, increased adoption (and lower prices) of electric vehicles, the millions of buildings equipped with solar, and especially in the declining capacity factors and increasing pace of coal retirements (power production as a percent of capacity for coal plants fell to 49.3% in 2021 from 67.1% in 2010, accompanying an average of 9,450 megawatts of retirements each year).
As we enter the heart of Energy Transition 2.0, we’ll replace our primary energy supply—our molecules, and the commodities or products throughout our economy that are produced from petrochemicals.
For example, gray hydrogen (produced from natural gas) is already a feedstock in many industrial processes. Green (and blue) hydrogen can be an effective replacement in those, as well as other processes where hydrogen isn’t considered. At a molecular level, it is identical to its gray counterpart. Up and down the industrial supply chains that support our economy, these types of replacements are being evaluated for their unit economics and emissions reduction potential.
While many aspects of these transitions will be complex—the U.S. has one distinct advantage: existing infrastructure available to be repurposed.
The two largest sources of energy in the U.S. are petroleum (36%) and natural gas (32%), which emerged as additions to the energy supply in the 21st century. In September, the U.S. produced over 12 million barrels a day of crude oil, primarily from horizontal wells—these barrels are moved across 190,000-plus miles of pipeline and refined into gasoline, diesel, and petrochemical feedstocks for the manufacturing industry. The U.S. produced an average of 94.6 billion cubic feet per day of natural gas in 2021. Natural gas quite literally powers the country’s economy—from electric generation to process heating. It’s delivered throughout the country by a three million-mile network.
This is what the path to reaching net-zero goals looks like.
You get the point: we have trillion-dollar industries engineered around the production, transportation, and storage of hydrocarbon molecules. Replacement of these is uncharted territory; navigating it will require navigating entrenched stakeholders, developing new technologies, and strong regulatory support. New technologies and infrastructure will inevitably be part of the solution—but effective reuse of the existing infrastructure and resources enabling the hydrocarbon economy will be what allow us to meet 2050’s deadline.
Effective Coordination and Reuse of Existing Infrastructure
We always need to build novel infrastructure to complete energy transitions. We constructed railroads for coal, pipelines for oil, different pipelines for gas, and an entire web of power generation and distribution for electricity. There have been some building blocks—pipelines were first used in the U.S. to move manufactured ‘town gas’ to consumers before they were adapted to move oil—but for the most part, we’ve built from the ground up. With Energy Transition 2.0, we have a first-of-its kind opportunity to accelerate transition through reuse of our existing infrastructure.
For example, building a hydrogen economy at the pace necessary to meet our net zero targets will require a substantial pipeline network. Transportation is both a critical and costly part of that economy. Our ability to reuse under-utilized CO2 pipelines or convert existing oil and gas pipeline rights-of-way to deliver hydrogen, and use our extensive seismic libraries and geologic knowledge to enable its low-cost storage will shave substantial capex and years off of execution.
There are a clear number of similar examples as you explore the implementation needs across the varied Energy Transition 2.0 technologies from CO2 to synthetic fuels. From the $755 billion alone invested in green energy technologies in 2021, it is clear the development of those examples will be well-funded. While the world often looks to startups, venture capital, and Silicon Valley to lead innovation and transform industry (and in this case, that may be true), a large amount of the economic benefit of that is likely to still go to these incumbents—who have better physical and cost positioning to deliver us the future, on a faster timeline than a new entrant can replicate.
If the U.S. is going to beat its 2050 net-zero deadline, it’s not going to be because of a scientific breakthrough nor a rapidly scaling startup alone—it is going to be on the backs of our existing energy industry—poised to repurpose itself to deliver us that future once we give them the right tools.
—John Rapaport is chief investment officer of Keyframe Capital.